FTfm Structured productsFINANCIAL TIMES SPECIAL REPORT | Monday May 10 2010

Sector triesto recoverafter toxicshock

Anew chapter hasopened up in thesorry tale of thealphabet soup of structuredproducts that have alreadycaused hundreds of billionsof dollars of losses to banks,insurance companies andother investors around theworld.

The Securities andExchange Commission’scharges of fraud againstGoldman Sachs, which thebank denies, has put thetroubled aspects of struc-tured finance back in thespotlight. It is the biggestaction taken against WallStreet in this financialcrisis.

At the centre of the SEC’scase is a collateralised debtobligation (CDO). Investorsbought slices of this CDObacked by mortgage-backedsecurities (MBS). TheseMBS were, in turn, backedby extremely risky US sub-prime mortgages.

The housing loans back-ing such CDOs were offeredat the height of the UShousing boom in manycases to people with little orno income. As house pricesfell, mortgage defaults onthese types of home loanssoared. The result: close to100 per cent default rates onsome of these CDOs, partic-ularly those dating from2007.

The structured financefiasco continues to be feltthroughout the world, ascentral banks wonder howmuch longer they need to

buoy liquidity and keeppumping cheap money intowobbly economies. The lackof securitisation and struc-tured finance is a factorthat may curb futurerecoveries.

“As of the end of 2009,existing transactions in thesecuritisation market hadprovided over $11,000bn infinancing to the US econ-omy,” said Charles Scully,head of structured financeat MetLife, in a recent letterto regulators. “However,this number is rapidlydeclining. The current stateof affairs in the securitisa-tion market is preventing itfrom contributing to USeconomic recovery at a verycritical time.”

MetLife’s insurance com-panies held $72.8bn(£47.7bn, €55.2bn) of struc-tured finance securities atthe end of last year. “As a

significant investor in thesecuritisation market,MetLife supports fundamen-tal changes to certain prac-tices in order to ensure thesecuritisation market’slong-term sustainability asa major financing sourcefor the economy and as aviable investment alterna-tive for MetLife’s generalaccounts to support manyof the insurance productsthat we sell to our custom-ers,” Mr Scully said.

The details of the crisisremain shocking becausemany of the securities thatproved virtually worthlesswere deemed to be verylow-risk at the time. Manyhad triple A credit ratings –rating agencies likeMoody’s Investors Serviceand Standard & Poor’sbelieved they represented

the safest possible debtinvestments. Default wasnot a risk that was associ-ated with a triple A secu-rity.

There were numerous fac-tors that fuelled this partic-ular debt crisis. The lax

underwriting standardsbehind many of the sub-prime loans meant defaultswould be higher than hadhistorically been observed.Models that measured andtried to forecast default andcorrelation risks, associated

with different types of debtand derivatives, permeatedthe investment world.Investors – including thebiggest banks and insur-ance companies – developeda blind faith in thesemodels.

When the models provedto be wrong, the losses cas-caded around the globe.The subprime mortgagedefaults echoed around thefinancial system becausehundreds of billions of dol-lars worth of securities hadbeen sold that were eitherbacked by those mortgages,or were based on deriva-tives whose valuesdepended on subprimehome loans.

Now, investors such asinsurance companies thatneed to invest in debtinvestments, are asking

whether they will again beable to buy structuredfinance. When it workswell, it is a way to pick upsome extra yield and gainexposures to risks that areotherwise not available.

But the shadow of CDOsand other toxic inventionsstill looms large. The SECcharges against GoldmanSachs come as efforts con-tinue by regulators andlawmakers around theglobe to set new rules thatwill create confidence instructured finance. Thereare detailed proposals doingthe rounds in the US, withdetailed suggestions offeredup by senators, and regula-tors ranging from the SECto the Federal DepositInsurance Corp. In the UK

Continued on Page 2

OverviewAline van Duynreports on industryand regulators’efforts to reformpractices afterastronomical losses

FinancialMarketsseries

ContentsCollateralised debtobligations make acomeback in the US.........2

Retail market in Europeshows signs of life............3

ETFs and the syntheticreplication debate.............4

Asian products aregetting simpler ..................4

Gillian Tett on a slowerglobal economy.................5

Wealthy clients act withcaution ................................6

Transparency and newproducts..............................7

US retail market .............. 7

Money market funds........8

Michael Kirkham/Heart

2 FINANCIAL TIMES MONDAY MAY 10 2010

Sector tries to recover after toxic shockContinued from Page 1

and eurozone there are alsomany suggestions abouthow to prevent securitisa-tion from being misused.

The changes include pro-posals for improving under-writing standards, such asrequiring banks or otherlenders to hang onto 5 percent of the loans originatedso they have “skin in thegame”.

But what is really prov-ing to be key for investorsis getting information theycan use.

In that way, investors canwork out for themselveswhether they want to buysecurities – without needing

to rely on rating agencies.“[What is needed is] per-

formance data on a dailybasis on the individualloans that support the secu-ritisation and the implica-tion of this performance foreach part of the structure ofthe securitisation,” saysRichard Field, managingdirector of TYI, a consult-ing and technology firm.

“If all market participantsreceive equal and full infor-mation on a daily basis,they can evaluate the riskand return of the securitisa-tion in both the primaryand secondary markets.”

At the centre of the crisis– and as is illustrated in theSEC’s case against Gold-

man Sachs – there was ashocking lack of informa-tion about what was actu-ally being bought. Investorsoutsourced their analysis torating agencies, or to othermanagers.

Many had no clue whatwas actually in the deals,and continue to struggle

to place a value on them.There are numerous pro-

posals for more disclosure.Questions include howoften reports should beupdated – daily, weekly ormonthly. Should thereports include detailedinformation at the assetlevel? At the pool level? Atthe tranche level? So far,there are no clear answers.

There are some concernsthat regulators may imposedifferent rules that clashwith each other, and inves-tors are urging them towork together.

It is also not clearwhether different rules willapply to mortgage-backeddeals, or to all securitisa-

tions, including sectors thathave not performed asbadly, such as auto loan orcredit card backed deals.

There are also concernsthat it is not just informa-tion, but the models under-pinning structured financethat need to be reassessed.

“As investors we arealways in favour of bettertransparency and more dis-closure,” says Ann Simp-son, senior portfolio man-ager at Calpers, the Calfor-nian pension scheme forpublic employees, in a com-ment to the FDIC aboutnew rules for securitisa-tions.

“More disclosure shouldalways lead to better

informed investment deci-sions. However many of theproblems of the recentfinancial crisis were aresult of poor applicationand forecasting of the dataavailable,” says MsSimpson.

“Better disclosure will failto provide for a strongermarket if the additionalinformation is simplyimplemented in the poormodels and forecasts whichled to the mispricing of riskin the first place.”

There are likely to be sev-eral more chapters in thestory about how, orwhether, structured financerecovers from the toxicshocks it has suffered.

Many had no cluewhat was actuallyin the deals, andcontinue tostruggle to place avalue on them

FTfm – Structured products

The ‘worst is over’for leveraged loans

Ensuring Cairn Capital’ssurvival during the globalfinancial crisis has under-pinned Paul Campbell’sbelief that some structuredcredit products have a via-ble future.

“Structured credit is animportant part of the prod-uct offering of an assetmanager like Cairn Capi-tal,” says Mr Campbell,chief executive of Cairn, aLondon-based credit assetmanager.

While others were downs-caling or heading for theexit, Cairn remained active,taking over mandates fromother asset managers andunravelling some of thecomplicated products builtin the boom years.

Cairn’s assets under man-agement have grown sub-stantially since the onset ofthe crisis, reaching $34.8bn(£22.8bn,€26.4bn) by the endof February, quite anachievement for a companywhose existence was threat-ened before the restructur-ing of its own specialinvestment vehicle in 2007.

Asked why he continuesto invest in such a contro-versial space, Mr Campbellsays: “Securitisation andother techniques are notgoing away. Our customersneed them and our econ-omy needs them.”

He notes that in Europe,

collateralised loan obliga-tions (CLOs), which offerinvestors access to largepools of leveraged loans,managed to perform largelyas expected throughout thecrisis.

As banks will have tolend more cautiously thanbefore, Mr Campbell pointsout that “alternativesources of financing willstill be required if econo-mies are to continue togrow in the future”.

The US leveraged loanmarket has already passedsome important milestoneson the path to recovery.Several new US CLOs havebeen launched this year,including a $525m productmanaged by Fraser Sullivanand a $500m CLO managed

by Symphony Asset Man-agement. Both of these arerefinancing vehicles butCitigroup recently startedmarketing a $300m “newmoney” CLO for ApolloManagement.

European CLO issuancehas declined from morethan €80bn in 2007 to virtu-ally zero and the re-openingof the market appearsuncertain even thoughthere is a huge volume ofleveraged loans that willrequire refinancing between2012 and 2014.

However, over the past 12

months, there has been asteady stream of CLO man-dates being sold to special-ist fund managers such asAvoca and Babson Capital.

Zak Summerscale, manag-ing director at Babson Capi-tal, reports a “massivechange” in sentimenttowards CLOs and “recur-ring interest” from pensionfunds and insurance compa-nies in the European lever-aged loan market, as thosebrave enough to invest in2009 had done “phenome-nally well”.

Brit Stickney, managingdirector for the income andgrowth team at Allianz Glo-bal Investors Capital, saysinsurers and other inves-tors able to invest duringthe crisis gained “equity-like returns” of 25-30 percent from leveraged loanswhile investing in a muchsafer part of the capitalstructure.

Mr Stickney says a keylesson of the crisis was theimportance of visibility onthe underlying assets –“what do I own?” – when aninvestment vehicle washighly leveraged, as well asa flexible structure thatwould allow the manager totrade out of positions.

Steve Baker, a seniorportfolio manager at CQS,the hedge fund group, saysmore restructurings in lev-eraged loans are expectedand further ratings down-grades are likely so it istoo early to say that themarket is “out of thewoods”, but the worstshould be over.

He highlights the use of“A-to-E” or amend-to-extendexecutions whereby a bor-rower without ready access

to capital markets, but witha debt maturing in 2013 or2014 is able to renegotiateterms and pay a fee orhigher margin in order torelieve the refinancing pres-sure on the company.

CQS also says there hasbeen an influx of new, non-traditional investors intoleveraged loan markets,including pension funds,insurance companies,superannuation funds andalso distressed funds.

Clayton Perry, chief oper-ating officer at Avoca Capi-tal, says no-one anticipatedthe depth or duration of thecrisis. However, by makingfast decisions around under-lying loans that might notsurvive or looked like hav-ing difficulty, Avoca wasable to trade out of posi-tions, leading to a signifi-cant outperformance acrossmost of its funds.

Mr Perry says an index ofleveraged loan prices before

the crisis would haveshown them trading at par“forever”, which led to amistaken view that loansdid not trade down.

That view had now been“blown out of the water”,but in the period between2003 and 2007 it helpedattract significant amountsof investor capital into theleveraged loan market.

“Some of the vast pool ofUS savings accumulated inmoney market funds flowed(via the asset backed com-mercial paper market, con-duits and SIVs) into everycredit asset class to provideleverage, and loans were noexception,” says Mr Perry.“The great surge of capitalinto the market meant itwas relatively easy to cre-ate CLOs and led to agreatly improved source offinancing for private equityplayers to execute lever-aged buy-outs.”

Mr Perry says there is

now a growing interestfrom pension funds and theinsurance sector, whichwants to increase alloca-tions to corporate creditmarkets. “We have movedfrom smaller pension fundsinvesting in the equity por-tions of CLOs pre-2007 tolarger funds investing morecapital but with no leveragein the last year. Many ofthose funds are now inter-ested in adding leverageusing CLOs but not to thepreviously accepted 10times,” says Mr Perry.

Noting that the US CLOmarket is now seeing newactivity, Mr Perry expectsthis to be followed by newlaunches in Europe as well.

However, he stresses akey difference will be thatnew CLOs will require dou-ble the equity capital thatwas used in 2005 so the newfunds will probably operateon 25 per cent equity and 75per cent debt.

Structured creditCollateralised loanobligations make acomeback, but sofar only in the US,writes Chris Flood

Citigroup recently started marketing a $300m “new money” CLO Bloomberg

‘Securitisation andother techniquesare not going away.Our customers . . .and our economyneed them’

FINANCIAL TIMES MONDAY MAY 10 2010 3

FTfm – Structured products

Investors still f indproducts appealing

Europe, home to the mostdeveloped market for struc-tured retail products, isexpected to stage a modestrecovery in 2010, but saleswill still not match the 2007peak. The underlying secu-rities markets remain vola-tile while regulators aretaking a closer interest inindustry practices.

Gross sales are expectedto rise by about 8 per centthis year from the 2009 fig-ure of $228bn (£150bn,€173bn) compared withincreases of 14 per cent inthe Americas and 9 per centin the Asia-Pacific region,according to data compiledby Structured RetailProd-ucts.com. Last year Euro-pean sales fell 21 per cent.

The Europe-wide trendconcealed very differentdevelopments in differentnational markets. In thetwo largest markets, Ger-many and Italy, sales fell 17per cent and 20 per centrespectively, to $59bn and$49bn. Spain was the big-gest loser with sales down44 per cent to $23bn whilethe UK was the most buoy-ant, recording an increaseof 50 per cent to $21bn,according to the website.

“There were substantialdifferences across the differ-ent market segments,” saysJean-Eric Pacini, head ofequity derivatives sales atBNP Paribas, London.“Products that declinedmost in volume were thosethat did not offer capitalguarantees or were shortvolatility; those in marketsthat faced regulatorychanges such as the Italianindex-linked life insurancebusiness; and those fromissuers that had creditspread issues at the time ofthe crisis.”

Investors were unsettledby the Lehman Brothersdefault and the realisationthat they had been unwit-tingly exposed to unknowncounterparties in the trans-actions they had enteredinto. The quality of adviceto retail investors also leftmuch to be desired.

In the UK, a review bythe Financial ServicesAuthority of advice given toinvestors in structuredinvestment products foundthat in 46 per cent of cases

in its sample the advicegiven was unsuitable. In afurther 23 per cent of casesit was unclear whether theadvice had been suitable,often because customerrecords were inadequate.

Yet the appeal of struc-tured products to investorsremains strong. “Wheninterest rates are very lowinvestors are looking foralternatives,” says RobertBenson, managing directorof Arete Consulting. “Struc-tured products are seen as away of getting a potentiallybetter return while still pro-tecting your capital. Inves-tors are cautious and areattracted to the capital-protected element of theproducts.”

The recent recovery involumes has two main driv-ers, according to Mr Pacini.“On the demand side, it islinked to trends in theequity markets, which havebeen positive, and on theoffer side, banks that with-drew at the climax of thecrisis are back in this mar-

ket promoting structuredproducts. But we are stillby no means back at thevolume levels of 2007.”

When the European mar-ket does recover, the prod-ucts on offer will differsomewhat from those beingsold in advance of the 2008bust. Investors are seekinggreater transparency in theoffering – including full dis-closure on counterparties tothe deal – and simpler prod-uct structures.

Complex pay-off arrange-ments that depend onopaque price triggers orimpose seemingly arbitrarycaps have fallen out offavour. “Investors simplywant attractive investmentideas that generate a decentreturn,” says Mr Benson.

At the same time productoriginators take heart fromclient interest in less con-ventional underlyinginvestments. During thefirst stage of the financialcrisis, investors clung toplain vanilla underlyingssuch as the FTSE 100, theEuro Stoxx or the S&P 500indices. But in recentmonths there has been aslow return to alternativeasset classes and to the-matic investments includ-ing sustainable assets,infrastructure and Bricstocks (companies in Brazil,

Russia, India and China).“The three key themes

are simplicity in terms ofstructure, transparency andregulation,” explains Rich-ard Couzens, global head ofproduct origination forinvestment solutions atBarclays Capital. One resultof these factors has been ashift to listed platforms,including a strong growthin demand for exchangetraded notes. However,some experts say the valueof a listing depends on therigour of the marketauthorities involved.

What is certain is thatregulation will play anincreasing role in the for-tunes of the sector. Finan-cial markets across theboard are under scrutinyand the retail structuredproducts niche is no excep-tion. Regulators around theworld are taking a hardlook at the quality of theservice provided and at theprotection provided to theretail investor.

The European Commis-sion is attempting to bringcoherence to a raft ofalready existing regulationso as to establish an effec-tive regulatory frameworkfor packaged retail invest-ment products (Prips). Inthe field of product informa-tion, it believes that theKey Information Documentdeveloped as part of therevised Ucits directive pro-vides a good benchmark fordisclosure practice.

The Mifid (Markets inFinancial Instruments)directive, meanwhile, con-tains rules covering sales,including conduct of busi-ness, inducements, suitabil-ity and conflicts of interest.But the rules often differaccording to the legal formof the product and the saleschannel and “this patch-work of legislation does notprovide a coherent andeffective regulatory frame-work for Prips”. The Com-mission is preparing legisla-tion to remedy this lack.

In the UK, the FinancialServices Authority put thesqueeze on firms marketingstructured products toretail investors and threewent into administration. Itis tightening its controlsand will undertake fol-low-up assessments during2010 to ensure firms aremeeting its advice stand-ards and are designing andmarketing products in anappropriate way.

“There is much moreuncertainty this year,” saysMr Benson. He is forecast-ing a moderate recovery butwarns that “the impact ofpending regulatory changescould significantly alter theoutcome”.

Retail marketA small revival isexpected in Europeas regulators lookat how to protectthe individualinvestor, writesCharles Batchelor

‘When interestrates are very lowinvestors arelooking foralternatives’

The FSA in the UK is tightening controls on structured products Alamy

4 FINANCIAL TIMES MONDAY MAY 10 2010

FTfm – Structured products

Caution sees ‘bells and’whistles’ products wane

More than a year has passedsince the collapse of LehmanBrothers in September 2008, butshockwaves from its demise arestill reverberating through theworld of retail structured prod-ucts in Asia.

Investors across the region – inparticular those in Hong Kongand Singapore – lost billions ofdollars they had invested in com-plex structured products linkedto the failed US investmentbank.

In Hong Kong, the backlashagainst distributors of Lehman“minibonds” and other struc-tured products that turned sourhas lost much of its initial fury –thanks in part to a government-brokered settlement in which 16banks paid aggrieved investorsmore than HK$6.3bn (US$811m,£534m, €618m) in compensation.

But even now, the localbranches of some global financialgroups are regularly picketed byinvestors carrying placardsemblazoned with “devil bank” orsimilar slogans.

The protests, lawsuits, andcompensation awards are themost visible signs of the turmoilthat has ransacked Asia’s struc-tured products industry over thepast two years.

Behind the scenes, industrysources estimate that sales vol-umes in Asia have collapsed toabout a quarter of the $250bnseen during 2007.

Investors have become muchmore cautious about what prod-ucts they buy, while regulatorsin Hong Kong and Singaporehave clamped down on the salespractices of distributors. As aresult, the most complex prod-

ucts – the most lucrative forbanks – have disappeared fromthe market.

“People are much more carefulnow,” says Peter Chan, chairmanof the Alliance of Lehman Broth-ers Victims. “It’s much more dif-ficult for banks to sell thesekinds of products.”

Before the financial crisis, onebanker explains, Asian investorswere sold products with “allsorts of bells and whistles”.

Take the final series of Leh-man minibonds. Investors whobought them in effect put upcash to underwrite credit defaultswaps on a bundle of senior andsubordinated debt from blue-chips including HSBC, HutchisonWhampoa and StandardChartered.

Other products that were popu-lar during the boom yearsincluded structured notes thatwere linked to property indicesor complex baskets of stocksbased on themes such as health-care or water.

“Nowadays, the products aregetting much simpler and clientswant products that are easy tounderstand,” says Min Park,Asia head of equity derivativesand convertibles at Credit Suisse.

Credit Suisse is one of severalinvestment banks that create“white label” structured prod-ucts for intermediaries, such asprivate banks, which sell themon to the end investors.

Industry sources say profits inthis part of the industry havecollapsed – due to the doublewhammy of low volumes and lowmargins on simple products.Some groups only keep theiroperations alive to maintain cli-

ent relationships and in the hopethat volumes will bounce back.

Yet there are some signs ofhope for the industry.

“Since the second quarter oflast year volumes have started torecover in certain markets, espe-cially in Japan and Korea,” saysMr Park.

In Korea, total volumes tum-bled 70 per cent in 2008, Mr Parkestimates. Since then activityhas picked up, he says, and vol-umes are now only 30 to 50 percent below their 2007 peak.

Big markets such as HongKong and Singapore remaindepressed, especially in the retailsegment. In Taiwan, too, vol-umes are down an estimated 80to 90 per cent from the 2007 peakafter the local regulator clampeddown on the market.

Volumes are recovering, espe-cially in the private bankingindustry, says Thomas Fang, act-ing co-head of risk managementproducts in Asia for UBS.

“Coming into 2010, clients[intermediary banks] are morepositive, projecting growth fortheir business of anywherebetween 20 to 50 per cent,depending on their client seg-ment and region,” Mr Fang says.

The most popular productsthese days are ones that are liq-uid, transparent and simple –including warrants, exchangetraded funds (ETFs), and otherlisted products. In terms of over-the-counter products, clients arelooking for simpler structuresand shorter tenors than theywere in 2007.

For example, in Hong Kong’sprivate banking industry about60 per cent of total structuredproduct volumes are now com-prised of equity-linked notes(ELNs) with a maturity of onemonth, according to one person.

Industry executives expectproducts will again become morecomplex over time and volumeswill continue to rise.

“Investors have a genuine needfor structured solutions,” saysMr Fang.

AsiaThe most complexhave disappeared, butvolumes in the sectorare rising, writesRobert Cookson

To keep it simple,or syntheticallyreplicate

To synthetically replicate or not,that is the question providers inthe European exchange tradedfund market regularly ask them-selves.

For iShares, which controls 37per cent share of the EuropeanETF arena, the answer is no. ForLyxor Asset Management, dbx-trackers and almost every otherETF house the answer is yes.

“Synthetically structured ETFsthat replicate an index offer per-fect tracking,” says Manooj Mis-try, UK head of db x-trackers,which has a 16 per cent share ofthe European market. “Our cli-ents tell us this is something theywant and are quick to remind usit’s something they can’t get froma provider that buys the underly-ing stocks to track the index.”

His veiled attack is directed atiShares. All but a handful of thecompany’s 172 ETFs track theirbenchmarks through the purchaseof physical stocks.

Its first approach, the housethat was acquired by BlackRocklast year says, is to always try andbuy the underlying assets aheadof using the swap markets. “I’mnot saying that swaps are bad perse,” says Rory Tobin, head ofiShares International. “But it doescreate a counterparty risk andthat can scare off some investors.”

He adds: “If you go to adviserswith a synthetically replicatedsolution you have to educate themon two fronts: the actual ETFitself as well as the swaps market.

“The feedback we get from cli-ents is to keep it simple – theydraw comfort from the fact thereare no unforeseen risks with phys-ical replication.”

He might have a point. FrancisCandylaftis, the former chief exec-utive of Italy’s Eurizon, recentlyargued swap-based ETFs that tar-get retail investors should bebanned. He maintains Europeanregulators should outlaw syntheti-cally structured ETFs that trackan index, saying they do not com-ply with the transparency rules orexpectations Ucits vehicles claimto have. Providers, he says,should buy the physical assets.

iShares, however, which has$81.7bn (£53.8bn, €62.2bn) of assetsunder management in Europe, isthe only big house to do so andfor Bradley Kay, associate directorof European ETF research atMorningstar, this is why it holdsthe number one spot.

“I think the fact iShares buysthe underlying assets explainswhy it has seen such tremen-dous success, particularlywith retail investors,” hesays. “It is a much easier

product for them to handle. Ibelieve iShares would lose clientsand hence assets if they becamejust another synthetic replicationplayer.”

Others will tell you it is too dif-ficult or too expensive to buy thephysical stocks, agrees Axel Lom-holt, head of product developmentfor iShares Europe, “but a lot ofexposures can be replicated tradi-tionally if you have the platformand scale to do so – and we have”.

“Clients prefer ETFs that arebacked by the physical assets.Research shows this to be trueand that is why we go down thatroute when we can,” he adds.

Proponents of full synthetic rep-lication say the traditional routecan fail to mirror some bench-marks while swaps offer theadvantage of being able to repli-cate pretty much any asset classexposure. Some areas, such asvarious domestic emerging debtmarkets, are difficult to accessusing physical replication becauseof tax disadvantages that canexist for overseas investors.

Db x-trackers’ Mr Mistry is alsoquick to point out that more than50 per cent of ETF assets undermanagement are held in syntheti-cally replicated index products“and thus it’s not true to saypeople now don’t want theseproducts”.

The ETF market in Europe, hesays, is still very much an institu-tional one and clients have noproblem with swap-based ETFs.

“Europe is mostly an institu-tional market and that meansinvestors are more than comforta-ble with synthetically structuredETFs – they like the fact it givesthem perfect tracking error andremoves settlement risk.

“Yes – it does create a counter-party risk but we fully collateral-ise the majority of our funds andover-collateralise on all ourequity, commodity and hedgefund ETFs. We do this to removeany fears investors might haveregarding counterparty risk.”

Under European Ucits rules anycounterparty exposure is limitedto 10 per cent of a fund’s net assetvalue but, in practice, many ETFissuers manage this exposure to alower maximum percentage of 0-5per cent.

“Investors take a little bit of agamble with the synthetically rep-licated route but it’s down tothem to decide whether they wanta better return for the risk,” saysMorningstar’s Mr Kay.

ETFsiShares says no, manyothers say yes, findsChris Newlands. It’s upto investors to decide

‘Products are gettingmuch simpler andclients want productsthat are easy tounderstand’

ManoojMistry: ourclients wantsyntheticproducts

Investors inHong Konglost billionsfrom theLehmancollapse

Bloomberg

FINANCIAL TIMES MONDAY MAY 10 2010 5

FTfm – Structured products

Securitisation engine grinds down

In the past two decades,the global economy hasbeen operating like atwin engine plane. Onecredit “engine” thatpowered the economy wastraditional bank lending;the other was thesecuritisation market,which seemed to beaccelerating at a stunningpace – allowing the globaleconomy to fly ever higher.

Now, however, thissecond engine has virtuallygone into a stall, withsecuritisation activityhaving slumped since theonset of the crisis in 2007.

Consequently, the bigquestion that nowconfronts policymakers,investors and bankers alikeis whether there is anyway to kick-start thissecuritisation motor – orwhether the globaleconomy will be forced tofly at a slower speed?

The stakes are huge.Citi, the US bank,calculates that three yearsago some $8,000bn(£5,290bn, €6,209bn) assetswere securitised in theglobal markets. Indeed, bysome measures, thesecuritisation “engine” wasproviding more than halfof credit creation in the USeconomy in the first fewyears of the 21st century.

Since then, issuancevolumes have slumped.However, so far mostordinary consumers andpoliticians have not reallyfelt the impact of thatengine seizing up, becausewestern governments havebeen frenetically paperingover the cracks.

In the US, for example,the Federal Reserve hasacquired some $1,200bn ofprime mortgage loans,helping avert a collapse ofthe mortgage market.Meanwhile in Europe, theEuropean Central Bankhas been buying vastquantities of repackagedloans from the region’sbanks, via repo deals.

That means that onpaper, at least, Europeanbanks still appear to be“securitising” their debts –albeit with just the ECB asthe final buyer.

However, the pressure ismounting on the Europeanand US central bankers tostart scaling back theirsupport. Indeed, on bothsides of the Atlantic, partof that support is alreadybeing withdrawn. Thus the$8,000bn question now is

whether there is any wayfor the private sector tokick-start securitisationactivity on a large scalewithout government aid –before it disappears.

It could be tough. Inrecent months, regulatorsin the US and Europe haveunveiled numerousmeasures to overhaul howsecuritisation is done.These include reforms: tomake products much moretransparent to investorsand regulators; to forcebanks to keep more “skinin the game” by retainingabout 5 per cent of all thedeals they sell; and tochange how credit ratingagencies work, to ensurethey have fewer conflictsof interest. All these ideasare sensible in themselves,and necessary.

But sadly, while thesereforms might be necessaryto reboot the market, theyare not sufficient to get theengine going on a largeenough scale – or not, atleast, on anything like thescale seen in 2005 and 2006.

The reason centres onthe issue of buyer demand.Back in the days of thecredit bubble – whensecuritisation was booming– some of the demand forsecuritised products camefrom “real money”investors, such as pensionfunds or life insurancegroups. But more demand

also came from Asianfunds hunting for a placeto park their dollars.

Meanwhile, the largestsource of demand –particularly for triple Apaper – came from bank-controlled or bank-financedvehicles, in the form ofhedge funds andinvestment vehicles thatwere funded – andsometimes run – by banks,or from banks themselves.

The banks, in otherwords, were selling a largechunk of their product tobuyers invented by thebanks themselves. Andthese invented buyers wereparticularly crucial in thetriple A sector, since itwas usually impossible tomake money by buyingthese products during thecredit boom withoutengaging in some form ofregulatory or ratingsagency arbitrage.

These days, however,most of those “invented”buyers have disappeared.Sometimes that is becausebank credit has dried up,

or banks are reducing theirbalance sheets. However,another key problem isthat regulators are nowclamping down on theregulatory and ratingsarbitrage that used todrive the market.Meanwhile, many Asianinvestors have drawn intheir horns too.

Thus the key source ofdemand for securitisedproduct at present – and

for the foreseeable future –is “real money”. And theseinvestors tend to act indifferent ways from the old“invented” buyers: theydemand more yield; theyinsist on greatertransparency; and they willgenerally not gobble uptriple A assets for aminimal return.

The net result is that theworld is moving to aperiod when the

securitisation machine canfunction – but only at amuch slower, and costlier,speed. In the long run, thismay not be so bad.

If the sector can discovera more sustainable andsane model for doingbusiness, that would begood for all concerned.

However, in the shortrun, the reality is that ifthe securitisation machineis running at half the

speed seen a decade before,politicians and investorswill have to get used to aglobal economy that isflying at a much slowercredit speed, where debt ismore costly and rationed.

Ominously, fewpoliticians – or voters –seem prepared. Stand byfor more economic andpolitical jolts.

gillian.tett@ft.com

COMMENTGillian Tett

The banks wereselling . . . theirproduct to buyersinvented by thebanks themselves

6 FINANCIAL TIMES MONDAY MAY 10 2010

FTfm – Structured products

Private bankclients approachsector with caution

The role of structured prod-ucts – created by deriva-tives specialists at invest-ment banks – within theportfolios of wealthy pri-vate clients has long been atopic of debate. But feel-ings, both for and againstthe controversial devices,have considerably strength-ened since the onset of thefinancial crisis.

“There are lots of exam-ples of people we know of,who have been seriouslybeguiled by structures thatare not cheap, not simpleand not appropriate. Basi-cally, they are not fit forpurpose,” comments AdamWethered, co-founder of pri-vate investment office LordNorth Street.

From a portfolio point ofview, he says a clientshould have a diversity ofasset classes, appropriate totheir investment goal andunderstanding of risk.

A well diversified portfo-lio should be able to insureclients against big fallsthrough intricate balancingbetween equities, bonds andalternatives such as hedgefunds, private equity andreal estate. This is usuallybest done through regu-lated, collective funds,believes Mr Wethered.

Structured products, hesays, limit profits for clientsby charging excessive fees,while deploying cash thatcould be used for invest-ment, for buying a protec-tion-oriented derivative.

He also points to counter-party risk, which nobodywas really aware of untilthe Lehman collapse lead-ing to the crisis. One of hisclients, nearing retirement,was sold a Lehman-issuednote by a broker, with theaim of protecting assetsagainst equity downside.

“He ended up having tomake a bankruptcy claimagainst Lehmans and healso found out he did notown the underlying equitiesin the investment, whichcame as a bit of a shock tohim,” says Mr Wethered.“This was never explainedto him when the productwas sold.”

Even more sinister is thenotion of relationship man-agers selling inappropriate

products to clients on theorders of bank bosses. MrWethered knows more thanmost how large privatebanks work, having previ-ously been boss of both pri-vate banking and assetmanagement at JPMorgan.

“We are approached bypeople looking to leave pri-vate banks, as they arebeing asked to sell thingsfor revenue purposes,which they do not necessar-ily believe in,” he says.“The best advisers are loyalto their clients, which iswhat the regulators requirefrom all of us. That is occa-sionally in sharp conflictwith their contractual obli-gation to do what theiremployer tells them.”

Structured products aretypically more prevalent inadvisory portfolios, wherethe banker calls a client

and advises them aboutinvestment opportunities,rather than the discretion-ary model, where thewealthy individual or fam-ily outsources portfoliomanagement to the bank.

Most banks have a set ofthemes they create prod-ucts around. Currently,HSBC might advise clientsto invest in emerging mar-kets, through buying a bas-ket of Bric (Brazil, Russia,India and China) or Asiancurrencies.

Other investment ideasinclude favouring USagainst European equitymarkets, or investing in aparticular area of commodi-ties such as base metals.Structures can easily bedevised to accommodatethese views.

Often these offer 100 percent capital protection or 95per cent protection, allow-ing more leverage for cli-ents willing to take onsome risk.

Structured products cer-tainly became less popularamong clients after the cri-sis, says David Rumsey,head of product specialistsat HSBC Private Bank.“There was a knock-oneffect after Lehman. Coun-terparty risk and volatilitygot mixed together andgave structured products a

bad press. It was quiteunwarranted in many ways,but it did impact thebusiness.”

Despite going through alow point in the finalmonths of 2008, derivative-based strategies are onceagain picking up interestamong private clients, hesays. But because clientshave become more conserv-ative and the design of theproduct no longer has sucha speculative slant, hebelieves they are todaymuch more effective toolsin a portfolio than beforethe crisis.

“Prior to 2008, due to thehigher risk appetite, theinvestments’ success ratewas lower,” he says.

“Of the products welaunched since that time,although not all havereached maturity, the trackrecord looks very positive.Indeed a number of our cli-ents have enjoyed signifi-cant returns.”

The banks also haveanother take on accusationsthey are stuffing portfolioswith internally-producedvehicles.

“We have open architec-ture, but after the crisis of2008, there has been a verystrong appetite for HSBCissued notes, as issuer riskis then taken off the table,and customers wanted thesecurity of an institutionwith a strong balancesheet,” says Mr Rumsey.

Today, 90 per cent of thestructures sold by his bankare issued by HSBC, whichis one of only six banks nowtypically used for moststructures.

The most popular struc-ture sold to clients of SGHambros, the UK arm ofFrance’s Société GénéralePrivate Banking, invests inmarket volatility.

Clients can secure anannual bonus of around 7per cent for three years pro-vided a nominated index,such as the FTSE, does notcrash below an agreed floor,currently 30 per cent.

But some clients, typi-cally investment bankersthemselves, have preferredriskier credit productsinvesting in controversialdevices such as collateral-ised debt obligations(CDOs).

The bank recently con-ducted a study and ana-lysed all the structuredproducts it had sold to cli-ents during 2008 and 2009.“If we look at the stock ofproducts we launched overthat period, 80 per cent of

them are trading abovetheir issue price,” saysAlexandre Zimmermann,who heads the bank’s advi-sory desk. “And of the 20per cent which were tradingbelow, half of them werecapital protected by SG orby a guarantor with a simi-lar or better credit rating.Only 10 per cent of struc-tured notes we issued overthe last two years are reallyat risk.”

Other wealth managerslike Schroders, which nolonger has an internalinvestment bank, also usestructured products,although not as heavily asrivals with an advisorymentality.

“Large investment banks,over many years, havestructured and sold throughtheir distribution arms a lotof structured notes,” com-ments Rupert Robinson,

chief executive of SchrodersPrivate Bank.

“They have earned veryfat margins from these par-ticular instruments,” hesays, “although it would bewrong for me to saywhether they are appropri-ate or not for their wealthyclients.”

Buying a structured prod-uct can often be an “emi-nently sensible” and attrac-tive way of implementingan investment view, hesays, as they allow clientsto alter the risk/returncharacteristics of a tradi-tional asset class to tilt theodds in their favour.

“You can either partiallyor completely eliminate, netof costs, downside risk onyour chosen investment,”he says.

Schroders would use a 90to 95 per cent protectedstructured note, for

instance, to profit fromshort term movements inthe Japanese equity mar-ket, where they would notuse mutual funds normallyreserved for long-terminvestments.

Mr Robinson employs ateam of specialists that dis-sects the structured prod-ucts offered both by theircompetitors to clients, andby investment banks, todetermine the most effec-tive and cost-efficient struc-tures. A client should neverhave to pay more than 1 percent a year for a three yearnote on an equity invest-ment, he says.

“Due to the opaque pric-ing embedded into a returnprofile, it’s very difficult fora private individual to takeit apart,” he says.

“They may think they aregetting a good deal, but inreality they are not.”

Private bankingOpinions amongwealth managersvary widely, findsYuri Bender

HSBC is one of only six banks used for most structures Reuters

‘ . . . people . . . havebeen beguiled bystructures that arenot cheap, notsimple and notappropriate’

FINANCIAL TIMES MONDAY MAY 10 2010 ★

FTfm – Structured products

Investors demand more transparency

Two years into the financialcrisis, banks agree the lackof trust in the markets isstill the single most impor-tant factor when selectingthe underlying assets thatprovide pay-offs for struc-tured products. Investorsare demanding simplicityand transparency.

“We are back to the roots,and are providing solutionspeople are most familiarwith,” says Uwe Becker,head of investor solutionsEurope at Barclays Capital.

Today’s asset offeringsmust be seen in view of thesituation pre-Lehman.

Hedge fund and “black-box” structured products,where banks used proprie-tary trading strategies,were then flooding the mar-ket with devastatingconsequences.

Rupa Ganatra, director ofprivate banking solutions atRBC Capital Markets, says:“Illiquid and sometimescomplex underlying assetsmade many structuredproducts less transparent to

investors. [There was] lessemphasis on the underlyingassets that products werelinked to, as well as the sec-ondary market provisionsfor complex derivativesstructures and counterpartyrisk.”

With the market correc-tion, investor interestturned to the assets under-lying the products. Focus isnow firmly on “vanilla pay-offs linked to liquid, observ-able [assets]”, says MrGanatra.

In continental Europe,that means retail investorsare being offered very sim-ple rate-linked products,which can occasionally belinked to inflation notes.

Equity-linked productsare still rare, providers say.Those that come to marketreflect the demand fortransparency. Mainstreamindices, such as the S&P 500and the CAC40, dominatenew offerings, and leaveretail investors mostlyexposed to a domestic bas-ket of securities.

“Each time we try todiversify [with UK inves-tors], we are pushed back tothe Footsie,” says StéphaneRougier, director of struc-tured product solutions atAviva Investors. The man-ager has used focus groupsto trial concepts aroundnon-domestic indices, butthe results have not beenencouraging.

Instead, Aviva Investors

hopes to overcome investorwariness regarding geo-graphical diversification byusing the company’s in-house investment research.The use of the analyststeam may help “to get thetrust of the market”, saysMr Rougier, who believesfund management groups,because of their fiduciary

culture, have a lot to gainhere in favours from invest-ment banks.

One type of product thatfund managers hope willentice investors “who gottheir fingers burnt by thecrisis” is based on the CPPI(constant proportion portfo-lio insurance) model.Wrapped into funds, these

products are structured tooffer protection against vol-atility. Groups like AvivaInvestors and Natixis aredeveloping CPPI funds forthe retail market. “It’s likea car park for those whowant to be careful,” says MrRougier.

In a similar type ofresponse to the crisis, someproviders have embeddedrisk controls into theirproducts, where stocks varyaccording to the volatility.“It’s a little bit more com-plex than equity-index[linked products] becauseasset holdings vary,” saysMr Becker. The strategyhas had some success inSwitzerland.

RBC adds there is interestin products creating yieldenhancement with capitalpreservation. “It gives ourclients the comfort thatthey can observe not onlyour daily secondary marketpricing but also the key fac-tors that can impact thesecondary market price,”says Mr Ganatra.

That is not to say thatplain vanilla products arethe only order of the day.Wealth managers, in partic-ular, are showing a greaterappetite for riskier prod-ucts. “We’re back looking atthat space, and there aresome good deals out there,”says Gary Reynolds, chiefinvestment officer atCourtiers, a wealth man-ager. Sophisticated inves-

tors are particularlyattracted by the credit pro-file of the products’ coun-terparties.

“If you are ready to takecounterparty risks, thereare quite good pay-offs com-pared with two or threeyears ago,” adds MrReynolds.

Some providers havenoticed the trend, andbelieve it could be drivingdemand for bespoke indices.

Managers say they usestructured products, forexample, as a “proxy” to getexposure to asset classesthey are not authorised toaccess directly. That can bethe case with commodities,such as crude oil.

It can also be the casethat investors want toaccess particular assetclasses. “It’s not a bad timeto buy correlation,” notesMr Reynolds, who believesthere is no major crisis onthe horizon.

He takes a short positionon the correlation betweenthe FTSE and the Topix,while the structured prod-uct offers valuable down-side protection.

These types of strategiesare still a bit too risky forretail investors though. “Iwouldn’t be able to sleep atnight if advisers had toexplain bespoke indices,”says the head of retailstructured product sales fora London-based investmentbank.

New productsSince the crisis,retail customers aretaking interest inthe underlyingassets, writesBaptiste Aboulian

US retail market shuns complex vehicles

For many US investors,structured products are adirty word. Mainly used bybanks, investment funds,and wealthy individuals tomanage their exposure torisk and taxes, structuredproducts are widely blamedas one of the key culprits inthe global financial crisis.

“There was a disconnectbetween the Securities andExchange Commission, theInternal Revenue Service,and product manufacturersand for a long time struc-tured products proliferatedvirtually unchecked,” saysRob Ivanoff, director ofresearch at Financial Prod-ucts Research, a financialconsultancy.

Sales volumes of struc-tured notes fell dramati-cally in 2008, but recentlyhave started to rise, accord-ing to data provider mtn-i.Volumes in the first quarterwere close to $40bn (£26bn,€30bn), equivalent to 40 percent of last year’s volume.

“Before the crisis, salesstarted to take off, but oncethe crisis hit, the marketslowed down,” says MrIvanoff. “We’re starting tosee things pick up now.”

Still, structured productshave not been particularlypopular in the US amongindividual investorsbecause of their complexnature and the credit andliquidity risks involved.And while US regulatoryscrutiny on investmentvehicles that use deriva-tives is not likely to abatesoon, there are signs thatinvestor appetite for struc-tured products could rise inthe future as investors seekprinciple protection.

“Structured products inthe US have not taken off atthe retail level,” says Chris-topher Yeomans, a research

analyst at FinancialResearch Corporation, theBoston-based financial datacompany.

There are a few goodexplanations for this. Tobegin with, they are a rela-tively unknown product inthe US, and they lack abuzz factor that helpsinvestment products gaintraction. In fact, few inves-tors have a solid under-standing of the role thatstructured products play ina portfolio. “There’s no uni-versal definition of whatthey are, so people don’tknow about them,” says MrYeomans.

Second is the liquidityrisk. If investors are notprepared to hold these prod-ucts until maturity, theyare relatively painful to sellout of. “American consum-ers are generally uncom-fortable with the buy-and-hold nature of structuredproducts,” says Mr Yeo-mans.

Indeed, structured prod-ucts lack a public market-place where investors caneasily evaluate what is on

offer. And without a placefor prospective customersto weigh up products, it isdifficult to understand thenuances. “It’s hard to seewhat’s available and seeprice changes and make acomparison,” says TomManning, chief investmentofficer at Silver Bridge, theBoston-based investmentadvisory firm.

There is also credit risk.By and large, structuredproducts are issued by high-quality institutions, but asevidenced by the globalfinancial crisis, sometimesa solid credit rating is not asufficient guarantee. Inves-tors who bought productsissued by banks that failed,such as Lehman Brothers –which floated at least $900m

in structured products in2008, the same year it filedfor bankruptcy – have hadbig losses to contend with.

“It’s always important tothink about counterpartyrisk,” say Mr Manning.“The products are only asgood as the issuing com-pany.”

A fourth reason thatstructured products havenot seen widespread adop-tion in the US is due totheir pricing. “It’s not clearto customers how to price azero-coupon bond with aderivative product. It’s com-plicated. And we know thatadvisers tend to shy awayfrom things that are diffi-cult to explain,” says MrYeomans.

Most investment expertsdo not predict investorenthusiasm for structuredproducts in the US will risein the short term because ofthe regulatory uncertaintythat surrounds them. InMarch the Securities andExchange Commissionissued a moratorium on anyproducts that use deriva-tives to obtain a leveraged

or inverse effect until adetailed review had beenundertaken. And policy-makers in Washington arealso debating Senator ChrisDodd’s financial reform billthat includes provisionsthat could dramaticallytransform the way thederivatives industry oper-ates.

This could perhapschange down the road, how-ever. According to an inves-tor survey by mtn-i, nearly88 per cent of investorshave a “positive” view ofstructured products becauseof their capital protectionand capacity to tailor risk.

And as more and moreinvestors reach retirementage and seek an element ofcapital protection in theirportfolio, interest in struc-tured products could rise,say experts.

“There is a significantpart of the population thatis switching from wealthaccumulation to wealthpreservation and that couldbe where these productsgain some traction,” saysMr Yeomans.

US trendsThe sector has notappealed to theindividual investor,but that maychange, writesRebecca Knight

‘Advisers tend toshy away fromthings that aredifficult to explain’

Christopher Yeomans,Financial Research Corp

New complex risk control strategies have had some successin Switzerland Alamy

8 FINANCIAL TIMES MONDAY MAY 10 2010

FTfm‘Boring’ products that hid high risks

Money market funds sound,and are intended to be, dulland boring. They are sup-posed to provide investorswith an alternative to cash– liquid, generally low yield-ing – with the benefit ofdiversification.

In 2007 and 2008, theseassumptions were chal-lenged as money marketfunds first froze and thentottered with other finan-cial markets. It turned outthat many money marketfund managers had beenchasing yield in the lowinterest rate environmentand stuffed their funds withcollateralised debt obliga-tions, asset-backed commer-cial paper (ABCP) and otherexotica that were now caus-ing problems.

Since then, things havechanged a lot in the moneymarket fund arena. For astart, the rules havechanged in both the US andEurope, while managershave themselves changedtheir investment strategies,buying securities withshorter maturities, usingfewer structured productsand more cash, and inmany cases consideringchanges from constant netasset value to variable netasset value (CNav to VNav).This last means thatinstead of managing thefund so it would alwayshave the same value pershare (in the US, that wasusually $1), it could float,meaning fluctuation in thevalue would not necessarilyspell disaster.

According to a reportfrom Fitch Ratings, Euro-pean money market fundallocations to ABCP fellfrom around 30 per cent inJune 2007 to just below 10per cent in March 2009.

“Over the past two years,European money marketfunds have materiallymoved away from assetclasses that proved riskieror were perceived as such,”says the report. “As MMFhave played and continue toplay a role as a safe assetclass, and in the context ofrisk aversion, both in termsof liquidity and credit, MMFhave adopted very short-dated profiles and have onaverage reduced or evenexcluded asset-backedpaper.”

So where did it go wrong?“The initial products that

caused the problem were

US subprime RMBs (resi-dential mortgage-backedbonds),” says Tim Lucas,head of liquidity funds atAviva Investors. Theseproducts were based onpools of mortgages, pack-aged into tranches with therisk concentrated in one ormore slices while the restwas rated and sold as highquality debt.

Unfortunately, the “low-risk” tranches turned out tobe more vulnerable thanexpected and when thingsstarted to go wrong, manydefaulted.

“That was just the begin-ning,” says Mr Lucas. “Theasset-backed commercialpaper market then cameunder scrutiny – and peoplestopped buying them. ABCPhad been bought by a lot ofmoney market funds.”

In simple terms, ABCP isa debt product, the incomestream from which isderived from an underlyingportfolio of assets such asloans or leases. It will oftenhave liquidity facilitiesembedded in it, so that theincome from the ABCP canbe paid out even if it doesnot line up with the incomefrom the underlying assets– all of which makes it

seem like a good option formoney market fund manag-ers, for whom yield andliquidity are key.

Since September 2008,when markets froze follow-ing the collapse of LehmanBrothers, secondary liquid-ity has also been a consider-ation. At that point, inves-tors stopped buying ABCPand prices collapsed, wherebuyers could be found atall.

To dig investors (and themarket as a whole) out ofthe hole, the US FederalReserve, which was alreadyinjecting liquidity into themarket, broadened therange of securities againstwhich banks could borrowto include ABCP, as well ascreating a special liquidityfacility whereby the Fedcan lend or exchange assetsagainst these securities.

European ABCP does nothave a similar state supportsystem. In the UK, the Bankof England has amended itsasset purchase facility tocover certain, stringentlydefined ABCP, while theEuropean Central Bank hasspecifically excluded ABCPissues from its list of securi-ties eligible to use ascollateral.

This means Europeanmoney market funds con-sidering these productsmust take care to “balanceinvestments in EuropeanABCP programmes with theliquidity profile andredemption risks of theirfunds”, as the Fitch reportsays.

While fund managers areperhaps more aware of therisks than previously,

investors certainly are.“The investors we seek intoour fund have becomemuch more sophisticated intheir approach,” says ColinCookson, who is in chargeof business development forAviva’s liquidity funds.Where investors were satis-fied once they had askedthree questions: do youhave a triple A rating, howbig are you and who is your

sponsor, they are now “ask-ing more detailed questionsabout investment guide-lines, underlying securitiesand so on”.

The immediacy of the fearis receding, however, andmoney market fund manag-ers are looking at struc-tured products such asABCP again. But does thismean the same history willbe played out again as man-

agers chasing higher yieldsfill their funds with lowerquality or lower liquiditypaper?

Not necessarily, says MrLucas. “Are we going to becompetitive on yield again?Generally, no. There maybe some funds chasingyield, but mostly moneymarket funds are beingcompetitive on investmentguidelines.”

Money marketsManagers stuffedfunds with exoticaand problemsflowed. But ruleshave now changed,says Sophia Grene

‘The initial productsthat caused theproblem were USsubprime RMBs’

Tim LucasAviva Investors

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